RSM’s Weekly Tax Brief covers the latest developments on important tax news
Public accountability for civil servants who waste taxpayers’ money
RSM has been frankly critical of the mismatch in the treatment of non-compliant tax payers who can be publically named and shamed by HMRC, while civil servants who mismanage projects and waste huge amounts of taxes after they have been collected retain their anonymity. RSM are concerned that this mismatch was not only unjust as a matter of principle but also risked bringing the tax system in particular, and civil servants in general, into disrepute.
RSM were pleased to see, on the HMRC website, the publication of letters sent to Senior Responsible Owners (SROs) within the Government Major Projects Portfolio (GMPP). The letters, which generally run to four or more pages, are sent to named individuals and are accompanied by a 19-page briefing pack. The most recent four SRO appointment letters published by HMRC relate to the following projects:
– Building our future locations
– Customs Declaration services
– Tax-free childcare
RSM can not remember having seen earlier SRO appointment letters from HMRC or from any other government department. However, for those prepared to do the digging, it’s comforting to know that named civil servants are tasked with responsibility for major projects, and accountability if things go wrong.
Definitely a step in the right direction, and an enormous help in building up public trust. The symmetry with naming and shaming tax evaders is to be welcomed.
Yet another stealth tax?
Over the last couple of weeks there has been much discussion over the possibility that buy-to-let landlords may find themselves subject to income tax at rates up to 45% on any gain they make when disposing of the property. A buy-to-let landlord would normally expect to pay capital gains tax at 18% or 28% on such a disposal.
The background to this is the modernisation of the artificial transactions in land regime which was announced in the Budget 2016. A technical note was issued by HM Revenue & Customs on 16 March 2016 but the actual legislation was only issued at committee stage on 5 July.
While parts of the legislation apply specifically to non UK residents, clauses 76 (corporation tax) and 78 (income tax) transactions in UK land also apply to UK residents and to “a disposal of any land in the UK”, where just one of four conditions is met. The first of those conditions is that “the main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land”. Most investors would agree that one of their main purposes in buying any asset is to make a profit on sale. This wording is far wider than the “sole or main object” test used in the existing transactions in land rules. Indeed such wording could potentially bring an individual’s own home into the income tax net on sale if one of his purposes is to make a gain on sale in order to be able to “trade up” to a larger house in due course. Principal Private Residence relief could be denied if the gain is chargeable to income tax.
HMRC has responded to representations from The Law Society and the National Landlords’ Association to say that “generally property investors that buy properties to let out and some years later sell their properties will be subject to capital gains on disposal rather than being charged to income on disposal”. This statement itself raises uncertainties: the word “generally” is apparently there to enable income tax to apply where properties are developed before sale or where the vendor retains the right to share in profits from future development of the property. But how many years is “some years later” to ensure capital gains tax treatment?
Reassurances from HMRC are welcome but the legislation needs to be far clearer and more specific if there really is no intention to catch the buy-to-let landlord or other situations where making a profit is one of the main objects. We urge MPs to address this during the report stage this week, to ensure that the legislation is made clear and fit for purpose.
Tackling the hidden economy – the next big thing?
With all the recent focus on measures to combat tax avoidance and offshore evasion, it’s easy to overlook those that take a more basic approach of not paying their taxes by either failing to register with HMRC (‘ghosts’) or declaring only part of their activities (‘moonlighters’). Together these make up the hidden economy.
On 26 August 2016 HMRC published its consultation on tackling the hidden economy. HMRC is adopting a similar approach to that that taken in relation to tax avoidance by seeking to significantly increase the downside for persistent offenders. Suggested measures include higher penalties for repeated failures; making access to licences or services for business conditional on them being registered for tax; and extending HMRC’s bulk data-gathering powers to money service businesses.
However, the measures are broadly targeted at repeat offenders which HMRC acknowledges is a small number of businesses. Given the hidden economy is the biggest single contributor to the tax gap the key target must be identifying those that fail to register in the first place so perhaps the more significant question is whether there is enough focus on this area of non-compliance.
According to HMRC’s consultation document the hidden economy represents 18% of the overall £34bn tax gap but it receives much less publicity than tax avoidance, which is rarely out of the news and by comparison represents only 8%. Whilst £6.2bn attributable to the hidden economy is headline-grabbing, it is generally less newsworthy than tax avoidance because typically it doesn’t involve high profile companies, celebrities or occasionally even politicians.
Whilst the yield in individual hidden economy cases is typically (though not always) much lower than in individual tax avoidance cases, if HMRC’s are figures are to be believed, a lot of small cases add up to a very big number.
HMRC states that experience indicates that the greatest impact on the hidden economy tax gap stems from prevention; initiatives here include guidance and tools for new businesses and working with schools about the importance of paying tax. Whilst these may be useful, should there be more HMRC resource (perhaps diverted from compliant companies if resource is an issue) and wider publicity devoted to those that deliberately fail to join the tax club?
In the 80’s, Del Boy’s signature tune for Only Fools and Horses bragged about no income tax, no VAT but he remained something of a national treasure, so attitudes may be harder to challenge than tax avoidance. However, given the hidden economy represents a bigger overall compliance prize for HMRC than tax avoidance, perhaps now is the time for some rebalancing of the tax gap messaging.
VAT ‘blow’ to charities construction works
UK charities seeking VAT relief on the construction of new buildings have been dealt a blow by a tax court.
The Court of Appeal has determined that, it is not a charity’s objectives which will determine if it is afforded VAT reliefs, but whether fees paid by users fall within the scope of VAT.
Longridge on the Thames is a charity providing day and residential courses and activities related to water craft.
Fees charged for this instruction, and the use of the facilities, were ‘subsidised’ to the extent that costs incurred by Longridge were mitigated by the amount of grants and donations received, and by the work undertaken by unpaid volunteers.
To qualify for the VAT zero-rated construction of new training facilities, Longridge had to satisfy the Court of Appeal that the building would be used ‘otherwise than in the course or furtherance of a business’.
The UK’s ‘business test’ for VAT purposes dates back to the early 1980’s case of Lord Fisher, and has been relied upon ever since by charities, and the VAT courts alike, to determine whether construction work could be afforded VAT relief.
Applying the ‘Fisher tests’, the lower VAT courts found in favour of Longridge because, all other things considered, Longridge’s ‘predominant concern’ was the furtherance of its charitable objectives.
The Court of Appeal has stated however that the historic ‘Fisher tests’ no longer reflect the jurisprudence of European VAT law, or the VAT decisions of the European Court.
The Court of Appeal is effectively stating that, in determining whether a charity’s activity falls within the scope of VAT, it is not the furtherance of a charity’s objectives that need to be assessed, but the activity generating the income.
Having determined that the subsidised fees paid to Longridge was a business activity falling with the scope of VAT, the charity was not afforded VAT relief in its construction of the new training facilities.
As a result of this decision, Longridge now faces a VAT bill amounting to some £135k.
Following the ‘Brexit’ vote, there has been much speculation on whether the UK would still follow the jurisprudence of the European VAT law and the European VAT Court, or whether it would go its own way.
This decision, by a superior UK VAT court, has now however created a precedent in UK VAT case-law, and can now be relied upon by HMRC and other VAT tribunals to deny charities VAT reliefs.
HMRC extends transitional period for deducting VAT on pension scheme costs
HMRC has announced a 12 month extension to the transitional period under which an employer is entitled to deduct VAT paid on services relating to the administration of defined benefit pension schemes and the management of their assets.
The transitional period, which was due to end on 31 December 2016, has now been extended to 31 December 2017.
Trustees of pension schemes and sponsoring employers have, for some time, been anxiously awaiting some further clarification from HMRC of its policy regarding VAT recovery conditions of employers and trustees of DB pension schemes.
It would appear however that HMRC has encountered a number of issues in its attempt to reconcile the European VAT Court’s decision in PPG Holdings, with pension and financial service regulations, accounting rules and the implications of corporate tax deduction.
Given the contractual, regulatory, independence and accounting issues which HMRC will have to reconcile, we are unlikely to see any further guidance on VAT recovery of pension costs until at least Autumn 2017.